This is part two of a multi-part interview with Joe Boskovich Sr, Chairman and Chief Investment Officer of Old West Investment Management. The interview is part of ValueWalk’s Value Fund Interview Series.
Here’s part one:
The interview will be downloadable as a PDF at the end of the series.
Interview With Old West Investment Management [Pt. 2]
Would you mind sharing some of your current holdings, or perhaps your highest conviction idea?
Two of our core holdings are Fairfax Financial and Sears Holdings. Both companies are rarely discussed by the mainstream media, but fairly popular among Value Investing circles.
Fairfax Financial is an insurance holding company based in Toronto, Ontario, and is led by the
tremendously talented Chairman and CEO, Prem Watsa. Like Buffett, Watsa has made his shareholders a fortune by taking the premiums that Fairfax receives from its various insurance agencies worldwide, and investing those premiums in stocks, bonds, and other assets. Since 1985, Prem Watsa has compounded book value per share at 21.15% annually, and the common stock price has compounded at 19.8% annually.
Prem Watsa has amazingly navigated his company through and profited off of some of the most volatile investing landscapes. He sold half of his stocks and bought S&P put options ahead of the stock market crash of 1987, he bet big on Japanese puts- or rights to sell stocks at guaranteed prices – ahead of the Tokyo stock market collapse in 1990, and he made a fortune for his clients during the 2008 subprime mortgage crisis and the United States housing bubble. Today, we believe that Fairfax Financial is uniquely positioned to profit during the next bear market. Watsa sees global stock markets as overvalued, and he has instituted major hedges against a market drop. At the end of 2015, about 90% of the Fairfax’s equity and equity-related holdings were subject to defensive equity hedges and deflation protection. In short, if the market drops, Fairfax gains!!
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Despite Prem Watsa’s bearish views on the global stock market, Fairfax continues to identify many exciting investment opportunities for its long book, and our stake in Fairfax gives us exposure to those long-term investments. For example, in 2011, Fairfax purchased a 9% stake in the Bank of Ireland, and last year cashed in those shares for almost four times what they were worth at the time of purchase. In November 2014, Prem Watsa formed Fairfax India, a new $1 Billion investment holding company that is 30% owned by Fairfax Financial. This entity is aimed at acquiring control or significant influence positions in Indian companies based on Prem Watsa’s.
confidence in the “business-friendly government” of Indian Prime Minister Narendra Modi. Fairfax also has a large position in IBM, which we believe is in the midst of a formative transformation. The company continues to shed low margin business in favor of higher margin enterprises such as IT Infrastructure in the Cloud and Data Analytics such as its Watson subsidiary which is becoming an integral part of our healthcare system. The stock is trading at a ridiculously low price of $158 per share (10x earnings), down from $215 per share. Berkshire Hathaway is the largest holder, and they continue to add to their position. We see very limited downside with huge upside potential.
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Bank of Ireland, Fairfax India and IBM are just a few examples of long-term investments that Fairfax has been purchasing despite an overall negative macroeconomic view.
Sears Holdings is a company that we have owned for several years, and although it has been a large drag on our track record, we believe that it will be a big boost to our track record in the near future. Our thesis on Sears has always been the sum of the parts asset value, not Sears the retailer. One year, ago, management (Eddie Lampert) spun off 266 of their 1,727 properties into a REIT called Seritage Growth Properties. A widespread belief is that the best properties were spun into the REIT, robbing Sears Holdings of its last remaining value. This is far from the case. The 266 spun properties only represented 15% of their total property count, 20% of their square footage, and 1/3 of their owned properties. The quality of the properties still retained by Sears Holdings closely mirrors the quality of the real estate spun off. In exchange for these 266 properties, Sears received $3 billion, a fair value, in cash. Not only did this monetize an asset not earning anything, but it provided the company, and Eddie Lampert, options for capital allocation, a talent for which he is much better suited than as a retailer.
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Besides the remaining 160 million square feet of retail real estate, other valuable assets include three iconic brands (Kenmore, Craftsman, Die Hard), 800 auto centers, a re-insurance company, a product protection and warranty business, net inventory, and the largest home repair and installation operation in America. This past year, the two largest shareholders, Eddie Lampert and Bruce Berkowitz, continued to accumulate more shares. Together they now own 77% of the shares outstanding. We believe the sum of the parts valuation is in excess of $100 per share (today’s price is $17). There are many possibilities for how this all plays out, but we are confident in Sears and it’s transformation. For example, Sears recently announced that they would explore strategic alternatives for their Kenmore, Craftsman and Die Hard brands. Another example is the newly branded Innovel Solutions, a 1,100 truck delivery service that has signed up the likes of Costco and the U.S Military and is making money.